COMMENT China's economic power mightier
than the sword By Brendan
China is facing intensifying
political and economic disputes with Japan, the
United States and the European Union. Meanwhile,
the outlook for the global economy is decidedly
grim, with the International Monetary Fund
forecasting a prolonged recession in Europe and
severe budgetary woes in the US.
crucial juncture, China's leadership is exploring
avenues for leveraging the country's growing
economic clout into geopolitical gains. If used
wisely and consistently, China's economic power
could be a powerful instrument for advancing its
foreign-policy goals. The government's push to use financial
capabilities to further
diplomatic objectives will have dramatic effects
on the international system.
the Ministry of Foreign Affairs announced the
establishment of the Department of International
Economic Affairs. Zhu Caihua, vice-dean of China
Foreign Affairs University's School of
International Economy, very candidly stated the
goals of the new Department: "China's soaring
economic strength enables it to provide due
assistance to developing countries and the
European Union hit by the debt crisis. These moves
also give China more say and flexibility in
foreign relations."  Zhu went on to state that
this new department would be tasked with handling
"economic disputes with political backgrounds".
The establishment this department is a
sign that the leadership is increasingly aware of
the strategic implications of China's expanding
economy and immense foreign-currency reserves. The
government is seeking to exploit directly its
growing financial and economic clout for increased
geopolitical authority and flexibility.
The world should take notice - Beijing has
publicly signaled the ability and the willingness
to link access to vital Chinese loans and markets
with the overall aims of its foreign policy.
That China is a major force to reckon with
in international finance is nothing new - in
recent years it has lent more money to poor
nations than did the World Bank.  What is new
is China's open willingness to link economic goals
with geopolitical objectives. As Europe and the US
face a prolonged economic crisis, China's
leadership is feeling confident that the country's
new position in the global financial hierarchy
will pay geopolitical dividends.
of trade, areas of contention The timing of
this announcement is extremely meaningful.
Currently, China is coming under increased
political and economic pressure from three major
rivals (and trade partners) - Japan, the US, and
The dispute between China and
Japan over the Diaoyu/Senkaku Islands is having
pronounced economic effects in both nations.
Popular calls for a Chinese boycott of Japanese
goods have gained serious traction. Toyota's
Chinese sales were down 40% from a year earlier in
September.  Tens of thousands of seats on
flights between the two countries have been
cancelled, leading to the suspension of some
routes. Dozens of Japanese companies have been
expelled from the Western China International
The Chinese government has
already publicly stated an ability to punish the
Japanese government economically for the purchase
of the disputed islands from their private owner.
Last month, an article in the Communist Party-run
People's Daily, "Consider sanctions against
Japan", warned: "Japan's economy will suffer
severely if China were to impose sanctions on it.
China's loss would be relatively less."
This threat is based on objective reality
- China is still a relatively underdeveloped
economy with huge potential for internal growth,
while Japan has suffered from two decades of
economic stagnation. China's willingness to use
economic threats to further its territorial claims
is a significant aspect of the current dispute.
The new Department of International
Economic Affairs may find itself busy dealing with
the US as well as Japan. The domestic politics of
the United States will have important implications
for China's emerging economic diplomacy.
recent report from the Congressional Intelligence
Committee has warned US corporations not to do
business with the Chinese telecommunication
companies Huawei and ZTE. Instead of finding a
specific instance of wrongdoing, the report warned
of the potential for future trouble. Mike Rogers,
chairman of the committee, warned: "As this report
shows, we have serious concerns about Huawei and
ZTE, and their connection to the Communist
government of China. China is known to be the
major perpetrator of cyber-espionage, and Huawei
and ZTE failed to alleviate serious concerns
throughout this important investigation. American
businesses should use other vendors." 
The US presidential race has additional
repercussions for China's international trade.
Both incumbent President Barack Obama and his
challenger Mitt Romney have played the
tough-on-China card for votes. Obama recently
blocked the installation of Chinese-made wind
turbines on the Oregon coast over concerns of the
potential for spying on a nearby military base.
 This was the first time a president had
prevented a foreign investment deal since 1990.
Meanwhile Romney has come out with his
most forceful criticism of China to date, saying
it has "taken advantage of our laxity in enforcing
fair trade ... We will not allow them to keep
taking our jobs."  Romney has accused the
Chinese government of manipulating its currency to
compete unfairly with foreign manufacturers, and
has promised officially to declare China a
currency manipulator - a move that could lead to
economic sanctions - on his first day in office.
China is facing further economic heat in
the European theater. The EU has started an
anti-dumping investigation of Chinese solar
panels. This could threaten billions of euros in
Chinese exports to Europe.
politics by other means China not only
faces economic difficulties from potential US and
EU sanctions, but also long-term political
challenges from these Western powers. The United
States' strategic pivot toward Asia is seen as a
direct threat to China's regional security.
Meanwhile, both the US and the EU regularly
involve themselves in China's domestic politics.
Beijing views Western support for pro-reform
political activists as aggressive interference in
China's internal affairs.
As China faces
political and economic pressure from other major
powers, the leadership is examining means to
counter this pressure. Economic leverage - if used
correctly - could be an excellent tool for
promoting Beijing's current foreign-policy
China's potential for economic
growth is still much greater than that of any of
its major rivals, even in the midst of a relative
slowdown. The Chinese economy is highly dependent
on trade with the US, Japan and the EU, but they
are even more dependent on access to China's
manufacturing capability and expanding domestic
markets. Furthermore, these comparatively wealthy
nations are also highly dependent on Chinese
purchases of their government debt.
Economic warfare is a double-edged sword.
Japanese companies have been hurting more than
Chinese businesses in the recent standoff, but
both sides will be negatively affected by a
reduction in trade. All contenders stand to lose
in a trade war - but China less so than its
rivals. Its growth and liquidity mean it has more
room to maneuver than its potential opponents in
any economic confrontation.
sufficiently pressured, China may engage in
economic brinksmanship to secure its interests.
The EU and the US face debt crises, while
China holds roughly US$3 trillion in
foreign-currency reserves. The balance of
financial power should be obvious to all sides. By
forming the Department of International Economic
Affairs, the government is signaling an awareness
of its ability to use China's economic strength as
a foreign-policy tool.
This new department
will use financial means to defend the
leadership's core interests: access to foreign
markets, territorial integrity, and the Communist
Party of China's monopoly on political power. The
government may not been keen on bailing out Europe
if European governments continue to bankroll
Chinese dissidents. Beijing may be even less keen
on lending to Washington the funds needed to
expand America's military presence in Asia.
The formation of the Department of
International Economic Affairs is an important
step in formalizing the use of China's economic
power as an instrument in diplomatic disputes. As
China continues to develop economically, its
leadership has little interest in starting costly
confrontations. China will only use economic
leverage to retaliate for sanctions, or to secure
its core interests. Its financial weapons are
likely to remain sheathed so long as other nations
do not directly threaten the Chinese economy or
the main policy objectives of the Chinese